Current Commentary

Did you catch the Trillion-Dollar Obama lie last night?

During President Obama's 60 Minutes interview with Steve Kroft, Kroft asked if there is a limit to how much money the US could spend and -- in Kroft's words "print" -- to bail out the banks. Obama replied that we would reach our limit to bail out the banks when foreigners grew tired of loaning us money. Based on the words of the Chinese premier on March 13^th and based on the Fed monetizing over a trillion dollars of debt just last week, WE'RE ALREADY THERE.

Obama went on to talk about how "credit worthy" the US is perceived internationally and how we have nothing to worry about. As if the statements of the Chinese premier and the actions of the Fed were not enough, we also have the EU and Russia clamoring for a new world reserve currency to replace the dollar because they are concerned that continued Fed actions will reduce the US dollar to Monopoly money.

Obama either told a trillion-dollar lie on national TV last night, or he just doesn't get a trillion-dollar concept. Or maybe it's some combination of both. Either explanation is most worrisome.

Thursday, March 19, 2009 

What's the bigger story: $165M, $100B, or $1T?

Last night I watched the 7 PM CBS evening news. That news program is as mainstream, pro-Obama, pro-administration, pro-establishment as it gets. I watch the program to see what is seen by the man who works a 50-hour week, does a 45-minute commute, and comes home to crash on his couch for 25 minutes of news.

The program opened with AIG-bonusgate, a 165-million-dollar story. The story ran for the first six minutes of the news broadcast. There was CBS' "economics correspondent" explaining the AIG-bonusgate story to the news anchor.

At the six-minute mark, the economics correspondent mentioned the Fed's move yesterday to monetize (create from thin air with keystrokes on a computer) one trillion dollars of debt that nobody else is willing or able to lend us. Of this monetization, the anchor asked, "What does this mean?" And the economics correspondent said that "the Fed is still very concerned about the country going into a deep recession and is using all its powers to stop it."

Hmm, sounds nice. No mention whatsoever of the 100 billion dollars of bailout money that went straight to counterparty banks, many of which are foreign owned.

Not to sound like the guy talking about the grassy knoll, but does anyone else see subterfuge, smoke & mirrors, and misdirection here? The mainstream media are missing the real story. Why would a television news program burn its opening six minutes on the federal budget equivalent of chump change (the AIG bonuses), and then gloss over a mind bogglingly unprecedented amount of money? Yes, the bonuses have more of a human interest element and concepts like inflation and monetization of debt are abstract concepts that don't interest CBS' target audience. However, to put my grassy-knoll-cap on, does anyone else find it convenient that a provision that would have prevented the bonus money was specifically taken out of the bailout by Senator Chris Dodd, was known about by the Treasury Secretary for months, and was announced within days of the one- trillion-dollar Fed move -- all just in time for them to have live congressional hearings on the same day that the Fed announced their one trillion dollars of monetization?

Is it possible that these bonuses were planned months ago as a news shield for a huge announcement of government actions that will take from those who were/are responsible (savers) and will give to those who were irresponsible? Otherwise, the actions make no sense. The unfortunate thing is that inflation lags far enough behind changes in monetary policy so that by the time we are really hurting from this, the average voter won't be able to connect the dots and assign blame at the voting booth. The blame must be assigned to any member of Congress who has supported these bank bailouts.

We must "clean the house" and remove the members of Congress who voted for this theft.

Wednesday, March 18, 2009 

300B US treasuries + 700B MBS's = 1T of monetized debt

When Asia and the Middle East are unwilling and unable to loan us the money to run our massive public deficits and bailouts, and when you can't garner the political support to raise taxes, the only option is MONETIZATION, just a fancy term for printing money.

Today the Fed announced a huge plan to print 300 BILLION dollars to buy longterm treasuries and another 750 BILLION dollars to buy mortgage backed securities. This will be "spent" over the course of just six months. The next shoe to drop will be when foreign central banks start selling their dollar holdings and trillions of dollars that had been sitting sequestered as reserves go into circulation.

I'm reminded of the burn at Burning Man where they burn down a 100-foot tall structure. Even fully engulfed in flames that thing stood for a good 20 minutes, but once one of the main vertical support columns buckled, the entire thing came down in a matter of seconds.

Gold has rallied almost $50 on the announcement, and the Comex price to physical delivery price spread is at an all time high.

This is going to be disastrously painful for all but the wealthy because inflation is effectively a regressive tax that disproportionately hurts lower incomes.

No civilization in the history of the world has ever taxed, spent, regulated, or printed its way to prosperity. It is egotistically delusional to think that we are any different.

Wednesday, March 18, 2009

Consumer prices rise 0.4% in February

That annualizes to 5%. Lead primarily by rising gas and clothing prices, it was the highest monthly price increase since July 2008 (remember gas prices of 2008?) which was annualizing at almost 9%.

To anyone who thinks a deep recession will keep the lid on consumer prices, I point to the 1970s stagflation. For heaven's sake, a word was invented to explain the previously unfathomable phenomenon.

Now we have the Fed meeting to figure out how they will "stimulate the economy" with the Fed funds rate already at zero. I know their answer to this one: Gas up the helicopter and fire up the printing presses. It's "Helicopter Ben" to the rescue!

Tuesday, March 17, 2009

Will interest rates ever head back up?
Where are housing prices going?

At this point, given the hand our central planners have tipped, I am inclined to say not anytime soon on the rates, and we may be nearing a bottom on housing.

I had this conversation with a potential borrower yesterday. He asked me what I thought about where the housing market, specifically in Baltimore, would head. My answer in the absence of any further artificial government interference, measured in US dollars, would be down. By fundamental measurements such as incomes and rents, housing, even in Baltimore, should fall further. If interest rates were to ever head up appreciably, housing prices would certainly fall much further. But if rates are held artificially low at the cost of devaluing the dollars used to buy real estate, the answer becomes much more interesting. Also, if you wanted to measure the price of real estate in anything but fiat money (for example, measured in gold, silver, barrels of oil, gallons of milk, loaves of bread, or Big Macs), the answer would illustrate the main concept I'm talking about and point out the sleight of hand, smoke-and-mirrors game that our central planners are playing on us.

Since the biggest variable that will impact the future of housing prices is mortgage interest rates, let's explore those: As I've been saying right along, if our traditional lending sources become unwilling or unable to lend to us, rates will go up, unless the Fed decides to print money to "lend" us. After watching Bernanke's 60 Minutes interview and seeing he had enough candor to use the words "print money" when describing what the Fed was doing to keep mortgage and treasury rates down, I'm inclined to believe that they will print money all day if that's what it takes to keep rates from going up.

Allow me to repeat, bold, and isolate the importance of what just happened:

We had a Fed Chief get on national TV for an interview (a first ever) and say that THE FED PLANS TO PRINT MONEY AND THAT THIS IS GOOD.

If the Fed plans to hold rates artificially low for the foreseeable future, what does that mean for housing prices, and what is the trade off cost for printing all this money to buy treasuries and mortgage backed securities to keep rates low?

The answer to both of those questions is inflation. More money equals less purchasing power for each unit of money. Less purchasing power for each unit of money means that it takes more money to buy something. This move will help to keep housing prices up in that it will take more dollars to buy a house than it would were it not for this "fix," but it will also take more dollars to buy a gallon of milk or gas, to send your kids to college, to heat your home, to retire, or to do anything else, so did you really come out ahead? Are you really any better off? Why do we want expensive real estate anyway? Wouldn't the mark of a health economy be an economy where everyone could afford a nice home, not just dual six-figure incomes or those who choose to lie on their loan applications?

In other news: In a recent poll 37% OF AMERICANS SUPPORT GOVERNMENT BANK BAILOUTS. Some of those must come from the same 20% group that supported Bush right up until the end. Seriously, after these AIG bonuses, how can anyone support this reverse socialism anymore? The real question is WHY do we continue to do this in a representative democracy?

Finally, the best way of thinking about housing prices measured in dollars now is to think of yourself sitting on a train while the train next to you starts to move. Instead of housing prices falling as far as they should, our dollar is going to take the baton and finish up the relay race to the bottom.

Friday, March 13, 2009 

The cat is out of the bag

Today the Chinese premier effectively said, "Don't count on China to loan you money for your various bailouts and your huge deficit spending." This all just a few weeks after we sent Hillary panhandling in China.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

This is huge, and it is exactly how I said it would play out. If traditional lenders are unwilling or unable to loan us this money, we will have no alternative but to print even more of it. It will be a vicious cycle: The more money we print, the less any traditional lender will be willing to lend and the more we will have to print. Either rates will go way up to compensate, or -- if rates are held artificially low -- we will experience inflation that will make the 1970s look tame.

Next stop: hyperinflation. Hold on tight; it's going to be a bumpy ride.

Thursday, March 12, 2009 

The MADNESS continues

Anyone who will believe the word of a bank CEO or the accuracy/legitimacy of a ratings agency right now proves that the idiocy of the free markets can't be cured and that the system as we know it needs to collapse in order to purge the rampant myopia and amnesia.

The stock market has been up for about three days now based on two reports about as legit as a $3 bill.

First, on Tuesday Citi announced that it had an operating profit for the first two months of the year. In an aside they acknowledged that this operating profit did not recognize or account for loan losses or for asset markdown losses related to loan losses. In other words, Citi had enough interest revenue to cover their basic overhead -- office space, utilities and salaries. And Citi stated that, but Citi completely ignored the huge 10's of billions, possibly 100's of billions of losses that they have from making loans that aren't getting paid back as the Harvard MBA's and MIT math majors said they would be paid back. And the market bought it!

Then today, S&P -- a ratings agency that gave triple-A ratings to bundles of loans that had been made to people with bad credit, no money, and stretched or imaginary income, when an AAA rating was required to get big money like 401ks, insurance companies, pension funds, and sovereign wealth funds involved in the Ponzi scheme -- cut GE's rating from AAA to AA. Analysts had expected a bigger downgrade. Therefore, the small downgrade was viewed as good news.

But the analysts aren't seeing that it's a drunken sailor making the new rating.

These are the BS headfakes that keep the average 401k investors from running for the hills as they should. If you want to day trade this market, go for it, but this is not the place to park money for longterm wealth building or even for wealth storage.

Monday, March 02, 2009 

What your stockbroker, CNBC, and Obama don't want you to know

Right now the stock market is at roughly 6800. For some time now I've been calling for under 5000 by 2010. Want to know how I came up with that and draw your own conclusion?

http://stockcharts.com/charts/historical/djia1900.html

I looked through the historical data, took note of events that created that data, and baked in some inflation to come up with a figure of roughly 3600. Months ago when the Dow was over 12,000 and I first made this call, I could not bring myself to make a call for a Dow of 3000 something, so I optimistically rounded up to 5000. My intent was to bring attention to the fact that -- as low as we had already fallen -- we still had a ways to go and, and it was best to get out of stocks.

What it means to you is that, if you are still in stocks, you should get out and not even think of buying back in till the dust has settled. Traders, stock brokers, investment banks, or politicians don't want you to see a long historical chart. The Titanic would run out of life boats, and they'd go down with the ship. Take a closer look at the 1920-1940 graph and note 1930 and 1931. We hit the iceberg in July of 2007 when the ratings agencies basically said that crap -- even when bundled -- is still crap and that loans made to people unwilling or unable to pay back would result in losing a lot of money. That would make 2007 the equal of 1929, and 2008 the equal of 1930, and 2009 the equal of 1931. Note the sharp, strong up-ticks on the graph in 1930 and 1931. The first 6 months of 1930 made almost half the losses from '29. But also note the general direction, which is straight down to the low in the middle of 1932 (1932 equaling our 2010), representing a total loss of 90% over from the 1929 high. It would take 26 years, just to break even, not adjusted for inflation, or opportunity loss from other investments.

Finally, for any perma-bull, glass-half-full, rose-colored cheerleaders out there who talk price-to-earnings ratio: Please recognize that price data information is current up to the second, but earnings data information trails by at least 3 months. This means the "buy, buy, buy" low P/E ratios that you are screaming about will dramatically increase when your earnings get updated.